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The U.S. Constitution and the Tobacco "Master Settlement Agreement"

The Competitive Enterprise Institute waged a legal fight against the corrupt $200 billion tobacco deal signed in 1998 between 46 state attorneys general and major tobacco companies. The lawsuit was first filed in federal district court in Louisiana on August 2, 2005 and was appealed to the U.S. Supreme Court, which declined to hear the case on March 7, 2011. The case alleged that the tobacco “Master Settlement Agreement” (MSA) was unconstitutional because it violated the Compact Clause of the U.S. Constitution:

No State shall, without the Consent of Congress … enter into any Agreement or Compact with another State. ( U.S. Constitution, Article I, Section 10)

The Compact Clause was designed to prevent states from collectively encroaching on federal power or ganging up on other states. The tobacco settlement does both. The MSA set up a national government/tobacco cartel that harmed consumers and small businesses by increasing cigarette prices and restricting competition. It was a backroom deal between state governments and big tobacco companies. Not surprisingly, the winners in the settlement were sitting at the negotiating table.

State attorneys general became breadwinners for their states, thrust themselves into the limelight, and expanded their own power. Trial lawyers associated with the state lawsuits won an estimated $ 13 billion windfall that, in some cases, amounted to tens of thousands of dollars per hour of work. Health activists won some long-sought restrictions on cigarette marketing and a new, tobacco-funded anti-smoking group, the American Legacy Foundation.

Tobacco companies were big winners, too. They ended the state lawsuits and secured the states as allies in protecting their own market share and financial well-being. In short, once the industry decided to settle, the former adversaries–attorneys general and major tobacco companies–shared similar interests: to keep major companies solvent and thriving.

The losers in the settlement agreement were the taxpayers and small businesses excluded from the negotiations. The direct financial burden (higher cigarette prices) befell smokers, many of them low-wage earners. Small tobacco companies were saddled with annual escrow payments designed to “level the playing field,” followed in subsequent years by a growing list of onerous mandates. Despite the fact that a massive new tax and regulatory regime was forged, other parties impacted by the settlement terms– average citizens, lawmakers, small businesses — were never given an opportunity to participate.

CEI had hoped to use the case to strike at the sort of attorney general activism and abuse of power that the tobacco settlement falsely legitimized. The plaintiffs in the case were a discount tobacco company, a tobacco shop, and an individual smoker. Erik Jaffe served as lead counsel in the case, assisted by former federal appellate judge and Stanford constitutional law professor Michael McConnell, and CEI attorneys Hans Bader and Sam Kazman.